Despite ongoing economic headwinds, house prices in the UK continue to rise.
Last month they hit a record high of seven times the average UK salary, according to Halifax.
But the rate of growth is said to be slowing down, in part due to rapid rises in mortgage interest rates.
According to the latest data from financial information service Moneyfacts, the average two-year and five-year fixed rate both increased for the eighth consecutive month in June, reaching 3.25 per cent and 3.37 per cent respectively.
Considerations: While 10-year fixed rates provide certainty for borrowers, they risk getting trapped long term in a product that no longer works for their needs
Since the base rate began rising in December 2021, the two-year rate has increased by 0.91 per cent and the five-year rate by 0.73 per cent.
Five-year fixed rates are by far the most popular mortgages for new customers at the moment, as they look to insure themselves against future rate hikes.
According to This is Money’s mortgage partner L&C, 83 per cent of all mortgage products taken in June were five-year fixes.
And interestingly, more people (9 per cent) opted for a 10-year fix than a two-year fix (8 per cent).
Fixing their rate for a decade will give borrowers long-term security about their monthly payments, but there are also pitfalls. We look at what homeowners need to consider.
Borrowers can compare the difference between a two, five and ten-year fixed rate deal using our mortgage comparison calculator powered by L&C.
Who should get a 10-year mortgage?
One drawback of a 10-year mortgage is that not all the high street lenders offer them. Natwest and HSBC do not have any 10-year deals, for example.
Where they are available, borrowers can find deals with deposits as low as 5 per cent – but many of the best 10-year products on offer are for existing customers looking to remortgage their properties.
The longer-term product makes sense for established homeowners who have found their ‘forever home’ and are looking for some certainty on their payments over a longer period as protection against fluctuations in interest rates.
‘Securing longer fix at the moment with the way things are going seems like a good idea, we can’t predict how long the interest rate increases will go on for. Borrowers tend to go for fixed rate because they like security,’ says Karen Noye, mortgage expert at wealth manager Quilter.
Chis Sykes, technical director at mortgage broker Private Finance, says it’s a good choice for anyone who wants long-term security. ‘Your classic example of someone taking a 10 year fixed is someone in their forever home who has lived through high interest rates and has heard horror stories.
‘And they are somebody who doesn’t want any hassle. In some circumstances you are having to pay a [rate] premium, although it isn’t as much as it used to be. But you have the advantage of not having to pay valuation legal, broker and lender product fees every two to three years.’
Not all high street lenders offer 10-year mortgages, but where they are available, borrowers can find deals with deposits as low as 5%
What are the rates?
Based on a £300,000 property with a 20 per cent deposit, 10-year fixed remortgage rates start from 3.49 per cent with a £999 fee, offered by Nationwide. Fee-free options for the same deal start from 3.64 per cent.
The best five-year deal for the same circumstances is with Allied Irish Bank, at 2.95 per cent with a £250 fee – which only asks for a minimum deposit of 15 per cent.
That is somewhat of an outlier with the next-cheapest deal with Santander sitting at 3.19 per cent with a £1,048 fee.
Those with a 40 per cent deposit can get a 10-year fix at 3.44 per cent with a £994 fee with TSB, or 3.71 per cent on a fee-free deal with Halifax.
On those terms, the best five-year fix is also the Allied Irish 2.95 per cent rate.
The cheapest rates on two-year fixes are broadly comparable to those on five-year deals at the moment.
What are the downsides of a 10-year deal?
Signing up to a long term fixed rate may seem sensible in the current climate, but will be less favourable if rates drop over the coming years.
They also leave you with little flexibility if your circumstances change. It is common for 10-year mortgages to come with early repayment fees of up to 6 per cent of the loan amount, trapping borrowers if they want to repay the mortgage off or if circumstances change and they wish to sell.
Mortgages can sometimes be ‘ported’ to a new property, but that isn’t always the case.
‘People who have a bit more equity to play with, tend to have more lenders on offer and they probably won’t have difficulty moving,’ says Noye.
‘While someone who is younger may tie themselves in for 10 years and want to move after 5, but the lender they are with won’t lend them what they need to do so.
‘So then they have to review their options and likely pay the penalties. Some lenders do reduce penalties as it gets closer to the end of the loan, but some have a block figure they require regardless.’
New flexible products offer borrowers mortgage terms of up to 40 years at a fixed rate, as well as the option to sell the property without penalties
What about even longer fixes?
There are also other fixed term products that allow for more flexibility.
Kensington Mortgages offers flexi-fixed term mortgages for terms of 11 to 40 years, offering buyers the chance to fix their monthly payments long term.
However, unlike other fixed-rate mortgages the product there is no penalty for selling the property and repaying the mortgage. It is also possible to move the mortgage to another home without incurring charges.
That said, remortgaging will still incur hefty early repayment charges, which may be an issue if mortgage interest rates drop substantially and the homeowner is paying far above the market average.
Online mortgage companies Habito and Molo finance also offer similar products with in-built flexibility. Across all these products, the rates are higher than the market average to begin with.
‘The key to that product is that if you sell the property you can pay them back without incurring a redemption charge,’ says Sykes.
‘What they are doing is that they allow that get out of jail free card because they know situations change but they still have high early redemption charges when you remortgage – but they are still giving you a lot of flexibility because it gives you openness to the market again if you decide to sell the property.’
The alternative to this kind of deal is a lifetime tracker mortgage, which will follow the base rate for its entire term, for example, First Direct’s deal at base rate plus 1.94 per cent (currently 3.19 per cent) for those with a 40 per cent deposit. But borrowers must be aware rates are rising and forecast to keep going up, as that happens the rate on the mortgage will too.
You can check the best lifetime trackers and look for loans without early repayment charges with our mortgage finder tool powered by partner L&C.
I don’t know if we’ll save money, but we know what we’ll pay forever’
Alex, a married father of one, took out a flexi-fixed mortgage with Kensington spoke to This is Money about why he chose the product.
He and his wife owned three properties, all with fixed 10-year mortgages, but he became concerned about what would happen at the end of their terms and his ability to take out other products in the future. He and his wife had decided that their main family home was going to be their forever home.
‘We are lucky enough that we just remortgaged the whole lot and consolidated,’ he says. ‘Long term stability and peace of mind were the main draws. We are not naïve enough to think that circumstances will never change and if circumstances do change it is good to have the option to port the mortgage.
‘Both my wife and I have a similar mind-set that we tend to save and we are never quite sure what we are saving for. But mortgage payments obviously come into that and now we have this sorted we can do a bit more living.
‘Will we save money in the long term? I don’t know but we do know that the cost of fixed and we know what we’ll pay forever.’
Vicki Harrison, mortgage expert at Kensington, says that the product is aimed at two main segments of the market. Group one is first time buyers who struggle to pass affordability tests for other mortgages.
Because this product doesn’t ever move to a variable rate they only need to be able to afford the fixed rate, rather than being able to cover any future rate fluctuations.
‘We launched it in November and we knew it would be a slow burn but it is something that is picking up now,’ she says.
Kensington Mortgage offers the product with a 5 per cent deposit at 4.07 per cent.
The second group the company is focusing on is people who are worried that they might be able to get a mortgage today, but may struggle in future – for example those who are planning on becoming self-employed. This product gives them certainty over what they will be paying in the future.
Harrison says that from what they have seen interest in fixed, longer term products is going up as people are concerned about future rate rises and the wider economic outlook.
As house prices continue to rise the government is reportedly mooting allowing 50-year mortgages that parents could pass on to children as inheritance
What about the government’s 50-year mortgages?
News recently broke that the government is reportedly looking at introducing mortgages with 50-year terms, rather than the typical 25 to 30. These could be inherited, which the government argues would help young people to get a foot on the property ladder.
The details are unclear, but critics were quick to point out its potential flaws.
‘It would take a serious rethink of mortgage regulation and the way mortgages are looked at,’ says Sykes.
‘Currently you would need to underwrite both the parents and the children, but obviously the children may be under 18 and have no income.
‘Perhaps if it was fixed for all that time by pension providers or long term financiers similar to bonds then it could lead to some relatively cheap finance too. Perhaps it is feasible, but it is sad we are having to talk about it at all. 50 years of debt to own a house.’
David Hollingworth, mortgage expert at broker L&C, says that there may be some upsides to the proposal.
‘In recent years more borrowers are electing for mortgage in excess of the traditional 25 years. That helps push down the monthly payments on a repayment mortgage and so a 50-year term would help with month-to-month affordability or allow borrowers to take a higher borrowing amount.
‘However the lower payment does come with a cost and extending a mortgage term will push up the total interest charge over the life of the mortgage substantially, typically adding tens of thousands.’
Like Sykes, Hollingworth also has concerns around how the lender will be able to be sure that the child inheriting the mortgage can take on the debt.
And there is also a question of whether the mortgage will be affordable in retirement when incomes traditionally reduce.
Best mortgage rates and how to find them
Mortgage rates have risen substantially as the Bank of England’s base rate has climbed rapidly.
If you are looking to buy your first home, move or remortgage, it’s important to get good independent mortgage advice from a broker who can help you find the best deal.
To help our readers find the best mortgage, This is Money has partnered with independent fee-free broker L&C.
Our mortgage calculator powered by L&C can let you filter deals to see which ones suit your home’s value and level of deposit.
You can also compare different mortgage fixed rate lengths, from two-year fixes, to five-year fixes and ten-year fixes, with monthly and total costs shown.
Use the tool at the link below to compare the best deals, factoring in both fees and rates. You can also start an application online in your own time and save it as you go along.
> Compare the best mortgage deals available now
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